What Does the Term “Legal Tender” Mean?

The term “legal tender” is very common in this industry and it's hugely important for an investor to know whether or not the coin they are purchasing is classed as legal tender. But what does this term mean, and why does it matter to you?

Legal Tender

In precious metal investing, the term “legal tender” is primarily used to describe a specific type of coin. However, strictly speaking, this term can also be used to describe any form of currency that is recognized by a legal system. This currency can be used as an exchange for goods or services, and defines the paper money in your wallet as much as it defines many of the silver/gold coins that you can purchase here on the GoldBroker website.

Advantages Of Legal Tender Coins

It is rarely advisable for you to cash your legal tender coin for the amount displayed on its face. This can be considered a benefit to owning legal tender coins if the value of the precious metal drops below that face value amount, but it would take a major global event for that to occur. In most cases, the face value of your legal tender coin will always be significantly lower than the value of the metal it contains.

There are many other benefits associated with owning legal tender coins though. These include:

  •         Purity: As they are produced by an official mint, these coins are often minted to a very high standard and are often much purer than coins produced by private mints.
  •         Recognizable: When it comes time to profit from your investment, the reputation of the mint and the coin, as well as its purity, should make legal tender coins easier to sell.
  •         Sales Tax Advantages: In many states, there is no sales tax on coins classed as legal tender, but there is a sales tax on those that are not. Laws differ from state to state, but this is the case in many of them.
  •         Capital Gains Tax: In some countries, there are capital gains tax exemptions for legal tender bullion.

How To Recognize Legal Tender Coins

There are two types of legal tender coins, those classed as “bullion” coins, and those classed as “commemorative coins”. The former are much more common and include everything from the Maple Leaf (produced by the Royal Canadian Mint) to the Silver Eagle (produced by the US Mint).

In both cases these coins will display the following characteristics:

  •         Face Value: This is the amount that the coin is worth and the amount that it can be exchanged for, at least in theory. This amount does not take into consideration the precious metal content, which means the intrinsic value of the coin is usually much higher.
  •         The Mint: Legal tender coins can only be produced by official mints — the ones who usually produce coins and notes for circulation. Their mark will typically be displayed on the coin, often as an initial.
  •         The Year: All legal tender coins display the year that they were minted. This information is usually found on the reverse or obverse of the coin.

Commemorative Legal Tender Coins

Some coins that are advertised as legal tender are not. In the case of bullion coins, where the coin’s intrinsic value comes courtesy of the precious metal content, there is no doubt that you are getting something that can be exchanged for its face value (although, as the precious metal value is usually much higher, this would be a mistake). However, certain commemorative coins — particularly those that can only be purchased from the mint that produces them — are often exempt.

In early 2016 it was announced that many commemorative coins produced by the Royal Mint, often with a face value that was equal to their cost, could not be cashed in, with the banks being instructed to refuse them.

This is because, in the strictest sense of the word, “legal tender” can only be classed as such when the recipient is willing to accept that particular form of payment (in the UK, home of the Royal Mint, it can also be used to settle court debts). There is also an interesting case from here in the US, dating back to 2007. It began when a lawsuit was filed against workers who received unreported wages in the form of bullion coins. From the worker’s perspective, they didn’t feel the need to report these wages because the total face value of these coins fell below the tax threshold. They were technically receiving very little money and therefore had no tax obligations, but at the same time, they had something with a sizable intrinsic value.

The government argued that the payments much be viewed based on intrinsic value, but lawyers acting on behalf of the defendants were able to point to precedents whereby the law made no legal distinction between the face value of bullion coins and the face value of paper money. In the end, the defendants were acquitted and the case proved to be a hugely important legal milestone, or at least it would have been if it had not seemingly been swept under the rug.